When it comes to creating a passive income stream for retirement, a Stocks and Shares ISA is an excellent tool. After all, any profits made or dividends received in this sort of account are free from tax. That could make a huge difference when it’s time to ditch the office for good.
But how much would someone need to accumulate to aim for £1,500 every month (£18,000 a year) using the 4% ‘safe withdrawal’ rule?
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Realistic goal
The answer to that question is £450,000. I know, that’s a huge number. But I reckon it’s achievable for someone willing to put their money to work in the stock market as early as possible and compound the value of what they own over time. Put £400 aside every month and — assuming an average annual return of 7% — our investor will have that massive pension pot in 30 years.
Now, I won’t shy away from the fact that this will all require a healthy dollop of discipline. But that’s always been the Foolish way. We invest for the long term. Think decades, not weeks, months or a year.
Then again, there’s no rule to say that an investor can’t target a higher average return and attempt to speed things up. To do this, they’ll need to take on more risk by owning a portfolio of individual company stocks. There’s no magic number but between 10 and 20 should give a good amount of diversification. This is important because there’s always a chance that a few in that group might seriously underperform.
Strong candidate
A company like Rio Tinto (LSE: RIO) could arguably make the cut. It’s one of the biggest miners around, digging up metals such as aluminium, lithium and copper from around the world. It’s also been pretty great source of dividends over time. Right now, the yield stands at 4.7% for the current financial year. That’s more than an investor would get from holding a FTSE 100 tracker fund (3%).
This is not to say that Rio is all about income. Far from it. The stock’s up almost 70% in the last 12 months off the back of strong earnings reports and rising commodity prices.
No sure thing
I rate Rio highly as a ‘buy and hold’ contender. But it’s far from a safe bet. Of course, no stock truly is. But the £120bn-cap makes its money from markets that are notoriously volatile. It has absolutely no say on the value of what it digs up. On top of this, mining is dangerous and unpredictable work.
For proof of just how tricky things can get, take a look at the behaviour of the share price in 2026 alone. At the beginning of the year, this stood at 6,000p, rising to almost 7,500p by the end of February. By mid-March, that gain was almost entirely wiped out as the USA-Iran war kicked off. It’s since recovered strongly.
Even so, the likely surge in demand for metals like copper over the next few decades as the world increasingly adopts clean energy, electric cars and other technologies suggests investors should at least consider having some exposure to companies like this.
Seen through this lens, any temporary drop might regarded as an opportunity to think about buying at a more attractive price.
